If I invited you to my house for dinner and you had never been there, the first thing you would want to know is the directions you should take to arrive. Essentially, you are asking for it a roadmap to get you from point A to point B. In currency trading, failure to chart your course without that roadmap will ensure you of losing money. Your currency trading plan is your roadmap.
Define your currency trading style
One of the first things you will need to do as you begin to develop your trading plan is to define your trading style. Defining your trading style is relatively simple. Essentially you want to determine your trade timeframe, your currency pair selection, your trade philosophy, and your risk tolerance.
Trade Time Frame
How long are you planning to hold your position? Are you more intrigued I capitalizing on short-term trade opportunities or perhaps you are more interested in significant shifts between currency pairs over a longer period of time.
Currency pairs
Are you going to trade a couple of currency pairs are you more interested in trading all the available currency pairs?
Trade philosophy
Different traders examine different trades using vastly different systems of analysis. Some are bound to technical analysis while others seem to lean more toward the fundamentals. Still others like a balance of the two. You will need to establish your trade philosophy as you develop your trading plan.
Risk Tolerance
How much risk are you willing to assume on a given trade or in a Forex market? You should determine this factor before you open an account, before you open a practice account, and most importantly before you fund any account. Some traders like to take a more aggressive approach and have no issues with writing the ups and downs of price movements. Others like to take a more conservative approach. This decision is based upon the individual personality of the currency trader. Don’t let anyone else try to talk you into becoming something you are not. At the end of the day you have to live with your decision. No one else does.
Developing your currency trading plan will help you ensure that bad trades don’t become very bad trades. By the same token a can also take winners and turn them into bigger winners. Remember your trading plan is your roadmap to help you navigate and manage the emotions and adrenaline that the Forex market is known for creating.
Trading currencies is really no different than trading any other type of security. Stock traders execute trades based on trading plans. Commodity traders execute their trades based on specific trading plans. Trading currencies is not easier than any other financial market and you should take the same course of action towards limiting your losses and managing your risk with a sound, specific trading plan that you will follow.
With that plan in hand you will find it much easier to not only make trades but to identify opportunities. Trading opportunities will present themselves by the minute. Your trading plan becomes a matrix in which you can lay those opportunities upon to decide whether or not it is a good fit for your investment dollar.
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